Emergent poverty traps and inequality at multiple levels impedes social mobility

TL;DR

This paper explores how individual traits and institutional factors interact to create persistent poverty and inequality traps, and demonstrates interventions that can produce sustainable social mobility despite shocks.

Contribution

It identifies the mechanisms behind poverty and inequality traps and shows how targeted interventions can generate positive feedback for resilience.

Findings

Addressing individual and institutional factors reduces poverty and inequality.

Interventions create positive feedback loops that enhance resilience against shocks.

Experiments demonstrate the effectiveness of specific strategies in breaking traps.

Abstract

Eradicating extreme poverty and inequality are the key leverage points to achieve the seventeen Sustainable Development goals. Yet, the reduction in extreme poverty and inequality are vulnerable to shocks such as the pandemic and climate change. We find that that these vulnerabilities emerge from the interaction between individual and institutional mechanisms. Individual characteristics like risk aversion, attention, and saving propensity can lead to sub-optimal diversification and low capital accumulation. These individual drivers are reinforced by institutional mechanisms such as lack of financial inclusion, access to technology, and economic segregation, leading to persistent inequality and poverty traps. Our experiments demonstrate that addressing above factors yields 'double dividend' - reducing poverty and inequality within-and-between communities and create positive feedback that can withstand shocks.